What is Social Security
What is Social Security?
Social Security is a federal government program started in 1935 during the Great Depression to help ensure that retired workers and their family members would not be destitute. Before Social Security, workers were responsible for their own retirement savings, or relied on help from relatives, friends, and neighbors. Because of the widespread poverty during the depression, Social Security was created to provide a basic level of income for retirees and their families.
The original Social Security Act provided only retirement benefits for the worker and provided mainly for lower income workers. Later provisions expanded the benefits to all workers and added payments to the worker’s family members, payments to disabled workers and their families, and survivors’ benefits in case of the premature death of the covered worker. However the system is still geared toward lower income workers.
Your Social Security “Tax”
Social Security is a “pay-as-you-go” system. This means you pay into the system while you’re in the workforce, and those funds are used immediately to provide Social Security benefits to current recipients. Later, when you retire, your Social Security benefits are funded from the wages of younger workers. About 96 percent of workers contribute a portion of each paycheck to Social Security, usually 6.2 percent, which their employers match. This contribution is often called the Social Security tax.
If you’re a high-earner, not all of your income is subject to the Social Security deduction. There is a maximum dollar amount set by law that is subject to Social Security withholdings. If your income is higher than this dollar amount, then only your income up to that amount is subject to withholding.
In 2014, the maximum salary that was subject to withholding was $117,000. If a worker earned $120,000 that year, only the first $117,000 was subject to Social Security deduction.
The amount is adjusted periodically for inflation. Click here to see the current maximum dollar amount that is subject to Social Security withholding.
In return for paying Social Security taxes while working, Social Security offers a monetary benefit starting when you reach a certain age. The next page describes how your Social Security benefit is determined.
What is Medicare?
What is Medicare?
Medicare is a federal government program created in the 1960s to help provide health care to individuals who are age 65 or older. Individuals below 65 who have been disabled for 24 consecutive months and those with end-stage renal disease (permanent kidney failure requiring dialysis or a transplant) are also eligible for Medicare.
The video below gives a short overview of Medicare. You can also view and download the official Medicare guide.
The Four Parts of Medicare
Medicare consists of four parts:
Part A covers in-hospital care. Part A is also called Hospital Insurance and includes treatment in hospitals, including a semi-private room, meals, supplies, and use of medical equipment. It also covers skilled nursing facilities, hospices, and at-home skilled nursing care such as physical, occupational, and speech therapy. Wheelchairs and walkers are also covered by Part A.
Part B, or Supplementary Medical Insurance, covers outpatient care. This includes doctors’ office visits, outpatient hospital care, lab tests, and medical devices like eyeglasses and prosthetic devices. Part B also covers some vaccinations and prescription drugs administered in doctors’ offices.
Part C consists of private health plans that administer Medicare benefits. Part C has mainly HMOs and PPOs that allow you to receive the benefits of the other parts together in one plan. These plans are called Medicare Advantage plans.
Part D, started in 2006, is the newest part. It covers prescription medications that you take at home, including insulin supplies and certain vaccines. Part D is available through several private insurance companies, each of which offers a different list of medications and costs. Alternatively, you can enroll in a Medicare Advantage (Part C) plan that also covers Part D medications.
What Medicare covers
Medicare covers most services that are considered “medically necessary.” Besides medical treatments, it covers some preventative screenings like pap smears, mammograms, bone density tests, colonoscopies, and screenings for heart disease, cancer, and diabetes.
But not all common services are covered. For example, Medicare doesn’t cover physical exams, routine vision, hearing and dental care. It also doesn’t cover nursing home care or medical services outside the United States. But, when you first sign up to Medicare Part B, you’re entitled to a one-time wellness checkup and history review within the first twelve months after signing up.
Is a test or treatment covered by Medicare? Find out here.
Under the Affordable Care Act, annual wellness checkups are included in Medicare. However these checkups are more like lifestyle counseling sessions with your physician than traditional physical exams. The doctor may check your height, weight, body mass, and blood pressure, but the bulk of the visit is discussion of your medical and family history, your health condition, and reducing risks of disease.
What Medicare costs
What Medicare costs
Premiums, deductibles, and coinsurance, oh my!
Medicare is funded partly by payroll deductions, similar to Social Security. The deduction is 2.9% of wages, usually half paid by the employee and half paid by the employer. These funds are placed in a trust fund that the government uses to reimburse doctors, hospitals, and private insurance companies. The rest of the funding for Medicare comes from those who are enrolled in the program. Yes, Medicare charges premiums and has deductibles and co-pays.
Premiums
Part A has no premium required for most people. Over 99 percent of enrollees are not required to pay a premium for Part A because they have at least 10 years of work history while paying Medicare payroll taxes.
If you do have to pay a Part A premium, this page shows the current amount.
Medicare Part B has a monthly premium. The Medicare Part B premium is determined each year at an amount needed to pay for 25 percent of the average cost of coverage. The standard premium, which is the premium paid by most enrollees, applies to those with annual household incomes that do not exceed a certain level. If your household income is higher than this amount, your premium will increase by an amount that depends on your income.
See this page to see current Part B premiums
For Part D, your cost depends on the prescription drugs you have and the pharmacy you use.
Most Part D plans also have monthly premiums. As of 2011, enrollees with higher incomes must pay an additional premium to the federal government that is based on their income. This extra premium, called the Income-Related Monthly Adjustment Amount (IRMAA), is deducted from Social Security benefits.
Deductibles
In addition to premiums, Part A and Part B have annual deductibles. You must pay the cost of your medical treatment and medications until the deductible is met, and then Medicare benefits begin paying. Many Part D plans also include deductibles, though some plan have no deductible.
This page shows the current premium and deductible costs of Part A, B, and D.
Coinsurance
Even after you’ve met the annual deductible, Medicare doesn’t pay the entire amount of the cost of treatment. Rather, Medicare pays 80% of the amount it allows for that treatment, and you pay the other 20%. The part you pay is called coinsurance.
Many doctors accept Medicare, but many don’t. A doctor who doesn’t accept Medicare cannot bill Medicare for your treatment, leaving you responsible for the whole cost.
Additionally, providers who accept Medicare may not accept the Medicare allowed amount for their payment. Doctors who are “on assignment” have agreed to accept the amount Medicare charges for the service you receive as their payment. Doctors who are not on assignment can charge up to 15 percent more than this amount, which you will have to pay.
So if you have medical treatment for which Medicare allows $100, and you go to a physician who is on assignment with Medicare, the doctor has agreed to accept $100 for the service. Your cost will be 20% of $100, or $20.
If you go to a physician who accepts Medicare but is not on assignment, the doctor could charge up to $115, and your total cost will be $20 + $15 = $35.
Finally, if you go to a physician who does not accept Medicare, they can charge whatever they like and Medicare will not pay any of it.
The Medicare physician search page enables you to find physicians who accept Medicare.
Because Medicare does not cover the full cost of treatment, and includes premiums and deductibles, many people purchase Medicare supplemental plans, also known as Medigap, from private insurance companies to help cover these out-of-pocket expenses.
Medicare supplements
As mentioned previously, Medicare has deductibles and often premiums for all parts. Additionally, Medicare pays only 80% of the Medicare-allowed cost of treatment. The other 20%, called co-insurance, is what you must pay. Many people choose to purchase Medicare supplements, called Medigap policies, which are sold by private insurance companies and pay the premiums, deductibles, and co-insurance. Some supplement policies also pay for treatment outside of the U.S.
Medicare supplements require a monthly premium to be paid, just like most insurance policies. If you and your spouse both require Medigap policies, you generally must each purchase your own policies; most Medicare supplements only cover one person. Medigap policies generally don’t cover vision or dental care, hearing aids, eyeglasses, or private nursing or long-term care. The insurance company must allow you to renew your Medigap policy even if you have health problems; you cannot be dropped from coverage as long as you pay your premium.
Get more information about Medigap at this page.